Wednesday 21 September 2011 10.53 EDT
First published on Wednesday 21 September 2011 10.53 EDT

Play.com, the largest of a group of Channel Islands-based websites selling CDs and DVDs at VAT-free prices, has been sold to a Japanese group for just £25m.

The sale comes months before an expected clampdown that will close the tax loophole on which Play's business was built. The company, founded 13 years ago, is the UK's biggest seller of DVDs online, with estimated annual sales of about £500m. It has 14 million registered users and a staff of 500, and its success has contributed to the problems of specialist retailers such as HMV.

The acquisition of the secretive, Jersey-based Play.com by the web conglomerate Rakuten follows a decision last week by the company's closest rival, The Hut Group, based in Guernsey, to ditch plans for a stock market flotation.

The Hut provides VAT-free web sales for Tesco, Argos and Asda. Sir Stuart Rose, the former Marks & Spencer boss, who this month said that he was willing to pay more tax to bolster Britain's public finances, is among shareholders in The Hut. The former Tesco boss Sir Terry Leahy is also a shareholder.

The UK Treasury conservatively estimates that it loses about £130m a year because of Channel Islands-based VAT avoidance websites, while independent music store campaigners claim that the dodge has forced thousands of shops to close after finding themselves unable to compete with web prices.

Goods on Channel Islands-based sites sold for less than £18 can legitimately be shipped to customers on the UK mainland without incurring any sales tax, under EU rules drafted almost 30 years ago.

However, George Osborne signalled his intention to close the loophole in his March budget. From November, the VAT-free threshold will be cut from £18 to £15 and the chancellor has pledged to announce plans to stamp out the practice by next March.

It is believed that officials in Brussels have already given Osborne assurances that action to close the loophole will not face opposition in Europe.

Play's founders, Richard Goulding, Simon Perrée and Peter de Bourcier, started the business in 1998 from the stockroom above a branch of the sportswear chain Athlete's Foot, which Goulding and Perrée ran as a Jersey franchise.

In an interview with the Guardian in 2009, Rowe declined to state what proportion of Play's sales were VAT-free: "Off the top of my head I don't know. We are not really concerned because [the VAT relief] has less of an effect on the company than it did in times gone by."

Play's parent group Zuma Investments, which has its headquarters in Jersey, is not required to publish financial statements but is considered one of Europe's most successful e-commerce operations. It is not clear how much the founding trio have made from the enterprise but the sale will deliver a substantial windfall.

Rakuten, which now has internet operations in 10 countries, has made a series of European acquisitions, including France's PriceMinister and the German online shopping mall Tradoria, and is keen to step up its presence. It described Play as "one of the UK's most successful e-commerce businesses".

The UK has the highest internet sales penetration in Europe and is expected to reach £37bn by 2014.